Reading 67: Introduction to the Measurement of Interest Rate 2011, effective, between, center, style

1215

Session 16: Fixed Income: Analysis and Valuation
Reading 67: Introduction to the Measurement of Interest Rate Risk

LOS i: Differentiate between modified convexity and effective convexity.

 

 

The distinction between modified convexity and effective convexity is that:

A) effective convexity accounts for changes in cash flows due to embedded options, while modified convexity does not.

B) different dealers may calculate modified convexity differently, but there is only one formula for effective convexity.

C) modified convexity becomes less accurate as the change in yield increases, but effective convexity corrects for this.

---

 

Effective convexity is the appropriate measure to use for bonds with embedded options because it takes into account the effect of the embedded options on the bond’s cash flows.

1215

One major difference between standard convexity and effective convexity is:

A) effective convexity reflects any change in estimated cash flows due to embedded bond options.

B) effective convexity is Macaulay's duration divided by [1 + yield/2].

C) standard convexity reflects any change in estimated cash flows due to embedded options.

---

The calculation of effective convexity requires an adjustment in the estimated bond values to reflect any change in estimated cash flows due to the presence of embedded options. Note that this is the same process used to calculate effective duration.

1215

Which of the following statements is most accurate concerning the differences between modified convexity and effective convexity?

A) Modified convexity takes into account changes in cash flows due to embedded options, while effective convexity does not.

B) For an option-free bond, modified convexity is slightly greater than effective convexity.

C) Effective convexity is most appropriate for bonds with embedded options.

---

Effective convexity is most appropriate for bonds with embedded options because it takes into account changes in cash flows due to changes in yield, while modified convexity does not. For an option-free bond, modified convexity and effective convexity should be very nearly equal.

1215

William Morgan, CFA, manages a fixed-income portfolio that contains several bonds with embedded options. Morgan would like to evaluate the sensitivity of his portfolio to large interest rate changes and will therefore use a convexity measure in addition to duration. The convexity measure that will best estimate the price sensitivity of Morgan’s portfolio is:

A) modified convexity.

B) effective convexity.

C) either effective or modified convexity.

---

Effective convexity is the appropriate measure because it takes into account changes in cash flows due to embedded options, while modified convexity does not.

懿珏汇

网络投票q188006335
★北洋水军网络推手★--专业的网络营销团队为您服务
业网络推手,擅长网络营销,网络策划，事件营销, 炒作红人，
身为企业的负责人，还为找不到客户发愁吗？
身为企业的负责人，还为品牌知名度的提升而发愁吗？
身为企业的负责人，还为产品销量的下滑而担忧吗？
身为企业的负责人，还为网络上负面信息带来的影响而担忧吗？
身为歌手艺人的你，还为不出名而烦恼吗？
身为个人的你，还为维权事件页孤枕难眠吗？
幕后高手助您瞬间红遍网络，缔造网络神话引领网络潮流
他叫林飞，没钱没权没干爹，天然屌丝无添加，普通得和他的名字一般。生活如此不济，孰料扛着大包也能“踩”到命中贵人！一场意外获得上天眷顾，穷苦书生像是乘坐时光机一般，他看到了自己的未来…自己竟是个短命种，37岁掉入臭水沟丧命…我呸，擦掉重写！

不过，这寒酸的命运中也有唯一的亮点…心仪的班花竟然是未来的老婆大人！有句话是蜘蛛侠说的：能力越大，责任也就越大。